Price elasticity

Price elasticity

The price elasticity tells how strong the demand reacts on a change of the price.

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Slide 1: Slide
EconomieMiddelbare schoolhavoLeerjaar 3

This lesson contains 31 slides, with interactive quizzes and text slides.

Lesson duration is: 30 min

Items in this lesson

Price elasticity

The price elasticity tells how strong the demand reacts on a change of the price.

Slide 1 -Slide

Elastic

A product is (price)elastic when the demand stongly reacts on a change of the pirce.

For example: When the price increases by 1 percent, the demanded quantity will drop more than 1 percent.

The other why around, when the price drops with 1 percent, the demanded quantity will rise more than one percent.

Slide 2 -Slide

Elastic

Luxery products are elastic: for example expensive holidays and the newest televisions. When the price drops, the demand rises strongly.

Slide 3 -Slide

Inelastic

A product is (price)inelastic when demand doesn't react strongly on a change of price.

For example when the price increases with one percent, the demand will drop less than one percent.

The other way around, when price drops with one percent, the demand will rise less than one percent.

Slide 4 -Slide

Inelastic

Examples of inelastic products are bread and fuel. Despite the price, people keep using them as much as they did before.

Slide 5 -Slide

Inferior
There are products people will buy less when their income increases. Consumers see these products as less worthy than other, more expensive simular products. When their income increases consumers buy a better and more expensive substitute product to replace the old one.

Slide 6 -Slide

Inferior
Examples of inferior products are: holiday in your own country. (people will travel abroad) or meat (they buy more expensive meat).

Slide 7 -Slide

When a product is elastic and the price increases with 2%. Then the demand will........
A
decreases with more than 2%
B
decreases with less than 2%
C
increases with more than 2%
D
increases with less than 2%

Slide 8 -Quiz

Elastic, inelastic, inferior

Slide 9 -Slide

Calculate price elasticity

Calculation for the price elasticity:

Ed between 0 and -1: inelastic

Esmaller than -1: elastic

Slide 10 -Slide

Example

Calculation for the price elasticity:

The price of a product increases with 2%.

The demand for this products decreases with 5%

Ed= -5/2 = -2,5                                -2,5 = < -1= elastic

Slide 11 -Slide

1. The price drops with 10%, demand increases with 20%. What is the elasticity?

A
Ed = -2 Inelastic
B
Ed = -2 Elastic
C
Ed = -0,5 Inelastic
D
Ed = -0,5 Elastic

Slide 12 -Quiz

Explanation

Formula price elasticity:

Ed = 20% / - 10% = -2

This is smaller than -1, so elastic

Slide 13 -Slide

2. A price increases with 10%. The elasticity is -1. What is the change of the demand?
A
Decreases with 1%
B
Decreases with 10%
C
Increases by 1%
D
Increases by 10%

Slide 14 -Quiz

Explanation

Formula

- 1 = percentage change Ed / 10%

percentage change Ed = -1 x 10% = - 10%

Slide 15 -Slide

3. Price drops with 5%.
The elasticity of the demand is -2.
By what percentage will the demand change?
A
Increases with 10%
B
Increases with 2,5%
C
Decreases with 2,5%
D
Decreases with 10%

Slide 16 -Quiz

Explanation

Formula:

- 2 = percentage change Ed / - 5%

percentage change demand = -2 x - 5% = 10%

Slide 17 -Slide

4. A product is inelastic. The price decreases. What will happen with the demand?
A
The demand will increase with a bigger percentage than the change of the price
B
The demand will increase with a smaller percentage than the change of the price
C
The demand will decrease with a bigger percentage than the change of the price
D
The demand will decrease with a smaller percentage than the change of the price

Slide 18 -Quiz

Explanation
With an inelastic product the demand will increase with a smaller percentage than the change of the price
When price increases, the percentage change of the supply will decrease less than the percentage change of the price.

Slide 19 -Slide

5. Elasticity is -3. The demand increases by 15%. By what percentage has the price been decreased?
A
3%
B
5%
C
15%
D
45%

Slide 20 -Quiz

Explanation

Formula:

- 3 = 15 / percentage change of the price

pergentage change of the price = 15% / - 3 = - 5%

(Decreased by 5 %)

Slide 21 -Slide

Price elasticity and the demand function
You can calculate the price elasticity when there is a demand function and a change of price.
First calculate the percentage change of the price, then calculate the percentage change of the quantity demanded.

Slide 22 -Slide

Example

The demand function is: qd = -10p + 500

The price increases from €10 too €15.

What is the price elasticity?

Slide 23 -Slide

Ed= -12,5 / 50 = -0,25
-0,25 = inelastic

Slide 24 -Slide

Extra exercise

Demand function: qd = -2p + 100

Price increases from 10 to 11.

What is the price elasticity?

Slide 25 -Slide

Qd = -50p + 1.000
Price increases from €4 to €5
What is the price elasticity?

Slide 26 -Open question

Ed= -2,5% / 10% = -0,25
-0,25 = inelastic

Slide 27 -Slide

The elasticity is -2. The price increases with 10%. The old quantity demand was 20.000. What is the new quantity demand?
A
16.000
B
18.000
C
22.000
D
24.000

Slide 28 -Quiz

Elasticity is -0,5. The quantity demand had been increased with 10%. The old price was € 25. What is the price now?
A
€ 20
B
€ 23,75
C
€ 27,50
D
€ 30

Slide 29 -Quiz

Elasticity is -0,2.
The price has been decreased by 5%.
The new quantity demand is 1000.
What was the old quantity demanded?
A
950
B
952
C
900
D
990

Slide 30 -Quiz

Turnover was € 10.000
Old price was € 5; The price has decreased with 10%
Elasticity -4
What is the new turn over?
A
€ 9.000
B
€ 12.500
C
€ 12.600
D
€ 14.000